Game on- Microsoft and Yahoo to battle the 800 pound gorilla

"Today this market is increasingly dominated by one player. Together Microsoft and Yahoo can offer a competitive choice."
Statement from Microsoft, Inc.

That's the official line from Microsoft in its quest to acquire Yahoo.

Sad to say we had to pass on this deal. We couldn't get the bank to go along with it. Microsoft on the other hand does not need a bank, as it is in a lot better shape than most of the nation's banks.

OK, so we all know who the big 800 pound gorilla in this game and that's Google. But, does anybody remember the name "Altavista"? Well Altavista used to be the 800 pound gorilla and the search engine du jour. What happened to Alta Vista was that it was taken over by the metrics of the web, where nothing is forever. Could Google be far behind?

The big question is, can Microsoft and Yahoo equal Google? If this hostile bid ever is finalized, it's going to be very interesting to watch the implementation of two very different cultures. Is Yahoo with all its Yahooligans going to stay Yahoo? Or, is a decidedly less cool northern neighbor Microsoft going to kill off any further web innovation at Yahoo?

Also, as I write this blog, the market has voted to punish, and push down Microsoft shares. We would not be surprised to see Microsoft shares dropped even further from current levels. Currently, we're trading around the $30.50-area.

Rest assured that this weekend most of the financial press will be writing about the potential marriage of Microsoft and Yahoo.

It is BIG NEWS!!!

There's no doubt about it, Google is the big Kahuna in the world of online advertising. But all this could change pretty quickly for Google, and here's why.

If you're not familiar with affiliate marketing, then you really don't know how Google makes its money in the trenches. Google shares revenues with thousands, if not millions of partnering web sites. Google advertising matches advertisers to web sites or searched words. This is what it does best and it does it very well.

It also pays the web site owners for this privilege. Any other company who decides on a similar course of action will also have to pay the website owners more for this same privilege.

Here's how I see it, if Microsoft decides to pay more than Google to appear on an affiliates website, then that money will have to come out of the fees it receives from its advertising income. In Google's last earnings period, it said that payouts to affiliates were an ever increasing cost of doing business.

Rest assured capitalism is alive and well and every affiliate, no matter how big or small practices it. Affiliates have no loyalty to Google, they will switch in a New York minute to whoever pays them the most money to be on their website. This in my opinion represents an "achilles heel" in the long run for Google.

Google is going to find it increasingly more expensive and difficult to retain its affiliates. If I were Microsoft, I would come in with killer deals and a greater share of the marketing pie for every affiliate web site that Google has a relationship with.

As for Google's stock, we expected that the potential re-emegence of a very real competitor will erode the big profit margins that Google has enjoyed in the past few years.

The Chinese have a saying that goes like this. "May you live in interesting times." Never has this been more true than today.

We expect that this historical battle between Google and Microsoft will be one to remember and one that will be analyzed at business schools around the world for years to come.

It's going to be interesting.

Have great weekend,

Adam Hewison,